"If only the government could wave a wand and create jobs"

by Timothy Taylor

September 15, 2011

Back in 1993 there was a movie called "Dave," which I went to see because it starred Kevin Kline. But for an economist, the ending of the movie was physically painful, because I was rolling my eyes so hard.

In "Dave," an everyday person who looks like the president of the United States ends up through a comic chain of implausibilities actually becoming president. The big end-of-movie wind-up for Kevin Kline's "Dave" character, acting as the wise and beloved president, is passing a law to eliminate unemployment by having the government guarantee a job for everyone.

You don't have to be an economist to suspect that solving unemployment isn't this simple. Really? The only reason the United States has unemployment is that we haven't passed a law guaranteeing jobs for all? And this great idea of eliminating unemployment by guaranteeing jobs for all hasn't occurred to Germany or Sweden or Japan or any other country?

Off the movie screen, incentives and tradeoffs can't be ignored. If the government is going to guarantee jobs with wages, it needs to pay for it with taxes, which affects incentives for those who pay current taxes, or with borrowed money, which tends to crowd out private-sector borrowers in the present and also affects the workers who will need to pay taxes to repay that borrowing in the future. Moreover, if you "guarantee" a job, what will be the pay and benefits? Is the job permanent? Does the government also pay for transportation and child care? Can the government require that you move to another place to take the job? What's the motivation to do the guaranteed job if you can't be fired? How will firms react when their current and potential employees can take these government jobs? How do we draw the line between helping those who would be unemployed and turning on a government spending spigot that will be hard to shut off?

Eighteen years after "Dave," I still roll my eyes when people talk as if the government can cure unemployment by passing a law. However, when an economy is sunk in recession, government can help to ease the pain with a combination of temporary spending increases and tax cuts. Thus, although I have I have my quarrels with how the various laws were designed and targeted, I overall supported both the Bush economic stimulus package in 2008 and the Obama stimulus in 2009.

I was predisposed to support at least some of President Obama's most recent labor proposals as well, with the unemployment rate still above 9 percent, but the proposals don't seem politically serious. When Obama gave his speech last Thursday, exhorting Congress to pass his bill without delay, he had not yet sent Congress a bill.

Then, when the bill arrived early this week, it no longer proposed having the bipartisan deficit commission take the jobs plan into account in its plans to address the deficit in the middle term — as Obama had proposed in the Thursday speech — but instead called for limiting deductions for those with high incomes. I favor raising the tax burden on those with higher incomes as part of an overall medium-term deficit-reduction package. But raising that issue now works against gaining support for an immediate bill to help some of the unemployed.

Ultimately, all of these bills are temporary palliatives--aspirin to dull the pain of a feverish economy. Government-supported jobs and stimulus packages are worthwhile when the unemployment rate is stuck above 9 percent, but they aren't a long-run path to lower unemployment. The economy needs hiring by private firms.

A pro-jobs agenda for the long run is a tougher task than waving a "Dave"-type magic wand. Some useful steps might include the following: Build a national program of apprenticeships to connect high school students with real-world job skills and possible future employers, as has been done in Germany. Redesign unemployment and disability rules to encourage employment while still protecting the needy, as has been done in the Netherlands and Denmark. Overhaul and retarget the 45 or so federal job training programs that already exist. Provide greater support for job search and for moving to take a job.

Other steps would focus on the broad climate for business: Reform the corporate tax code to close loopholes, reduce tax rates and encourage investment. Make sure that firms are following rules about environmental protection, financial disclosure and safety of workers and consumers, but then get out of the way and let them function. Take concrete steps to put federal government finances on a sustainable path over the next five to 10 years.

For most of the second half of the 20th century, the U.S. economy could assume, through better and worse years, that many firms would do most of their production within America's boundaries. But in the globalizing economy of the 21st century, firms have more choices. The United States needs to rethink and redesign its economic institutions to make itself a more attractive location when firms are deciding where to produce and hire.
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Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.